As I write it is Thursday 29th October 2009. Anyone with a taste for history may remember that this was the date of the Wall Street Crash in 1929 that ushered in the Great Depression. Here we sit on the 80th anniversary of one of the defining economic events of the 20th Century.
Last week we were looking at the Dow having pushed above 10,000 points for the first time since early October 2008. However, it has been having trouble holding that level, which is the confirmation I was looking for in order to be confident that it would move higher.
As a technical trader, one of the things I watch is the mid-point of the trading range during the previous bull or bear market. In this case we are looking at the bear market from the October 2007 top to the low in early March of 2009. The mid-point of this range is around 10,350, which is not very far from where the market is currently sitting.
Spend a moment and have a close look at this chart. You can see that the market powered out of the low in March this year, and has been trending steadily upwards ever since, with only a slight interruption in June. But look at the angle of ascent. Notice that it has been gradually tapering off, as though the market is gradually running out of steam.
What does this mean to a technical trader? Firstly, pick out the highs and lows on the chart since March. They have been consistently higher. When a market makes higher highs and higher lows, its trend is up. As long as the trend is up, you would be happy to be a buyer in the market. But if the trend seems to be losing strength, this would not be a good time to enter the market, as there would be a danger of getting in at the top.
Markets do not advance in straight lines; they move in waves. Thus every move up must be followed by a move down. When the moves up are greater than the moves down, we have an upward move. The time to buy is after the market falls and is starting back up again.
Again, you can see from the chart that the only meaningful reaction was the one in June. Thus at some stage the market would be due for another one, and the mid-point of the bear market would be a place I would expect to see it.
The crucial thing will be to watch what happens next. If the market has a pull-back from here or somewhere near here, and pulls back less than it did in June, this would be a signal to expect further upside. If it falls further, and then fails to cross its current high level around 10,100, that would be a signal that a more significant correction is in order.
Always stick with the trend.
Good Trading
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